How to Use a 1099-R Form
Form 1099, in general, is an IRS tax form used as an informative document to report income other than wages, salaries, and tips.
If you’re repaying student loans, you may be able to deduct up to $2,500 in interest payments from your taxable income on your 2020 tax return. The student loan interest deduction is designed to help make college more affordable for students and their parents.
Although student loan interest has been indefinitely suspended since March 2020 due to the COVID-19 pandemic, you may still be able to deduct interest paid in the first part of the year on your 2020 tax return.
Any borrower who files using single, head of household, qualifying widow, or married filing jointly status may be able to deduct student loan interest. Only the legal borrower who signs the loan documents is eligible for the deduction. In other words, parents can’t take the deduction for a student loan taken out by their child, even if they are making the payments.
Not all student loans qualify for the interest deduction, however the IRS lays out several requirements you must meet to take advantage of the deduction:
The loan must be used for your own, your spouse’s, or your dependent child’s education costs. Parent borrowers can’t take the deduction if their child files a separate tax return.
The entire loan must be used for qualifying education expenses (tuition, fees, room and board, books and supplies, and transportation). If you cashed out part of the loan to use for other expenses, you lose the deduction for the entire loan.
The student must have been enrolled at least half-time in a degree program at an eligible institution when the loan was made.
The loan proceeds must be used within a “reasonable” amount of time, typically 90 days, from the date loan funds were disbursed.
Things get a bit more complicated if you used nontaxable funds for any part of your educational expenses during the same period you took out a student loan. If you used scholarship or grant money, education assistance from an employer, or tax-free distributions from a Coverdell ESA, you have to reduce your qualifying educational expenses by the same amount. If the remaining expenses are less than your student loan amount for that period, you can’t deduct the interest on that student loan.
For example, if Joe’s education expenses in 2016 totaled $15,000, but he got a $1,500 scholarship from the university and $3,500 in tuition assistance from his employer, his qualifying expenses for the year would be $10,000. If Joe borrowed more than $10,000 in student loans in 2016, none of the interest would qualify for the student loan interest deduction.
You qualify for the full deduction if your modified adjusted gross income (MAGI) is $70,000 or less for a single filer and $140,000 or less for those with married filing joint status.
If your MAGI is between $70,000 and $85,000 (or $140,000 and $170,000 married filing joint), you qualify for a reduced deduction. The deduction phases out completely for incomes above those amounts.
The IRS has a simple worksheet to help you determine if you’re eligible for the student loan interest deduction. You’ll need your adjustable gross income (AGI) and a list of your education expenses paid with both taxable and nontaxable funds before you begin.
The student loan interest deduction is an above-the-line adjustment. Unlike a tax credit that reduces your actual tax payment, a deduction lowers your taxable income. The amount you save on taxes depends on your tax bracket.
For example, if you’re eligible for the full deduction of $2,500 and your tax rate is 22%, you’ll save $550 on your tax bill.
You don’t need to itemize your expenses on Schedule A to claim the student loan interest deduction. You can take the deduction in addition to the standard deduction.
If you file a Form 1040, 1040-SR, or 1040-NR, you can use the Student Loan Interest Deduction worksheet on page 94 of your 2020 tax return. If you file Form 2555 or 4563, you’ll use Worksheet 4.1 to calculate your student loan interest deduction. You can find that worksheet in IRS Publication 970, Tax Breaks for Education.
You’ll need your income information as well as Form 1098-E from each of your lenders. If you paid less than $600 in interest for the tax year, you may not automatically receive a 1098 from your lender. Since this is more likely in 2020 because of the student loan interest suspension, you may need to contact your loan servicer to get the amount of interest paid in 2020.
If your modified adjusted gross income is less than $70,000 (single) or $140,000 (married filing joint), you can deduct the full amount of student loan interest paid up to $2,500. You'll enter the actual amount of interest paid or $2,500, whichever is less, on Schedule 1, line 20.
If your MAGI is $70,000 or above, you’ll have to calculate the amount of disallowed interest, which you’ll then subtract from your total interest (or $2,500, whichever is less) to arrive at the student loan interest deduction.
The formula for disallowed interest looks like this:
Step 1: Interest paid MAGI - 65,00080,000 - 65,000 =
Step 2: 7,00015,000= disallowed interest
Once you determine the disallowed portion, you subtract it from your total interest paid (up to $2,500) to arrive at the student loan interest deduction.
Here are a few examples of the deduction in action:
Susan paid $1,200 in student loan interest and her MAGI was $68,000. She will enter the full $1,200 on Schedule 1, line 20.
Daniel paid $2,800 in student loan interest and his MAGI was $82,000. His deduction on line 20 is $1,180 [2,500 82,000-65,00080,000-65,000 = 2,833; 2,833 7,00015,000 = 1,320; 2,500 - 1,320 = 1,180].
Elena paid student loan interest of $2,200. She and Edmund had a MAGI of $175,000. They were not able to deduct any of her interest.
If you’re not a fan of complex math formulas, you can use an online student loan deduction calculator. The calculator at Student Loan Hero is one of the easiest to use.
If the amount of interest you paid is below the $2,500 threshold, you may also be able to treat other costs as interest if all the other requirements above are met.
Loan origination fee: If your lender charged a loan origination fee, you can treat this as interest and allocate the cost over the life of the loan. Don’t confuse origination fees with processing or commitment fees, however, since those fees can’t be treated as interest.
Credit card interest: If you opened a credit card and used it solely for qualifying educational expenses, you may be able to treat it as student loan interest for purposes of using the deduction.
Interest on student loan refis and consolidation loans: If you refinance your loans or take out a consolidation loan to pay off two or more student loans, you can deduct the interest as long as the new loans are with the same borrower as the loans they replace.
For the most part, calculating your student loan interest deduction is a straightforward process. The worksheet on page 94 is easy to use and anyone with a calculator can use the formula to calculate disallowed interest.
However, the student loan interest deduction isn’t the only tax break you may be eligible for. The American Opportunity Tax Credit and Lifetime Learning Credit are subtracted directly from the taxes you owe.
If you need help identifying all the ways you can use education costs to lower your taxes, connect with one of the experts at Taxfyle.
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